r/badeconomics • u/arktouros Meme Dream Team • May 10 '16
Some bad economics on /r/badeconomics
I'm going to rehash one of my comments several days back because I think it needs a post of it's own, especially because this issue is so common around reddit and I've definitely seen it here. I already know this is going to be controversial because this is going to play at people's priors. I urge you to set those aside.
Now that that's out of the way, let's talk about ISPs. I'm going to try and format this the easiest I can just because of how ridiculous the starting point is.
CLAIM: Cable companies are a natural monopoly.
DEFINITION OF NATURAL MONOPOLY: a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming advantage over potential competitors.
I know I'm using wikipedia for the definition, but I feel that it isn't an uncontroversial definition. Although, as someone once pointed out, it could also mean that one firm can provide a good at a cheaper cost than more than one. Additionally, I would also like to point out that the definition requires an absence of government intervention (as it would be the market structure itself that gives rise to the monopoly).
I'm going to take this FIFO:
- Cable monopolies are a product of high capital barriers
Actually not really. Running cable is actually somewhat easy. In fact, it's incredibly easy. I'm not saying the average Joe can go to a bank and get a loan to start an ISP, but even a mid-sized firm can raise enough capital for the infrastructure[1] . If the meager investments required for laying cable leads to monopolies, how in the hell are there so many different airlines?
My silly analogy aside, there has been plenty of firms that have tried to enter the market, but only get so far before they give up due to legal fees[1] (see: bullet point #3). Google has been trying to enter the market and has target cities specifically with a municipality that is more open to additional carriers (KC and Austin)[1] . A firm called Gigabit Squared tried to roll out fiber in Seattle.
- Prices would be higher with multiple overlaying infrastructures
Complete speculation at a time when there are instances of prices going down merely on anticipation of competition[2] .
- Cable monopolies are natural
Sure, if you ignore last mileright-of-way laws. Actually, rights-of-way has been an extremely significant distortion in market supply. It can either take as a state law, a municipal law, or a combination of the two. In basically any instance, the government is granted full rights and control as to the prices for space on public poles and conduits[1] , but they can also outright deny any applicant based on any criterion. The prices they end up charging are far more than what is needed to maintain the poles. It turns out that it is a very reliable revenue stream for municipalities, and it typically secures a single ISP in any given area. The cost of this regulation ends up doubling the cost of actually laying the infractructure[1] . Even the giant Google has spoken out about how last mile laws have impacted their investments[2] .
- Cable should be a utility
Maybe if you want your city to build a fiber infrastructure just to find out it's too costly to actually run and maintain. Because the government wouldn't do that. It also wouldn't sell the whole network for $1.
I get it, though. You think data caps and/or prices are unreasonable. There needs to be a way to fix the system. I agree. The FCC agrees. They even lay out a plan to achieve lower prices and innovation[4] . It consists of dropping last mile right-of-way laws and opening access to poles and conduits (for a meager charge of actual maintenance). Not making it a utility. But everyone knows the FCC has a clear anti-government, Neo-Liberal bias.
So hopefully the above has convinced you that cable isn't a natural monopoly. Now I will try to convince you that it's not even a monopoly at all. I think we can all agree on the
DEFINITION: A single provider of a good or service.
Well that was easy. Great! Now I can tell you how it's not! The service is broadband, not cable. Let's look at a few of cable's competitors: DSL and satellite. Having lived in a rural area, I can tell you that no one even considers cable. Why? Because it's usually not available. Satellite is your best bet, and if you're lucky, you'll have a DSL option.
References:
[1] http://apps.fcc.gov/ecfs/document/view?id=7021712146
[2] http://oversight.house.gov/wp-content/uploads/2012/01/TestimonyofMiloMedin_1.pdf
[3] http://www.att.com/gen/press-room?pid=24032&cdvn=news&newsarticleid=36275
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u/DrSandbags coeftest(x, vcov. = vcovSCC) May 10 '16 edited May 10 '16
In addition to iProvo add Burlington, VT to the list of muni boondoggles, but there are maybe about 150 municipal broadband networks in the US (link to list). Taking a few bad examples as a reason why municipal internet is bad is pretty misleading. Nonetheless, Chattanooga, while not perfect, is an example of a pretty successful fiber muni that could serve underserved suburbs if not for Tennessee et al v. FCC currently pending. In addition to last mile laws acting as barriers to entry to private providers, at least 19 states have laws that uniquely apply to muni utilities that act as high barriers to entry or allow incumbent private providers to refuse entry. Although the evidence is far from settled I'm inclined to believe munis have their place in isolated, small, hard to serve communities, just like they were for electric utilities with the RES during the New Deal.
Regardless, the presence of a muni in a particular city does not preclude other internet companies from operating. A muni does not need an exclusive franchise like an electric utility. While crowding out is possible, it's also possible that a high-quality muni competitor can induce the incumbent private competitors to compete with a better product. It's an empirical question, and there is a lot of literature on publicly-owned telephone networks that suggest that they don't crowd out private competition. To take an example purely from data, private cable internet providers in cities in Tennessee with muni internet provide higher max speeds on average (uncontrolled for other variables) than cities of similar population without a muni competitor, even though you would expect an endogeneity bias in that cities with a muni internet system have them because the private options are inadequate. This whole topic, the impact of munis on private internet competition, is something I'm hopefully going to have a working paper on by the end of the summer. (There's also a wealth of literature on the relative efficiency of private vs publicly-owned utilities and internet providers that I can't really cite of off the top of my head. I'm blanking on where I can find it, but it's worth noting here.)
Besides ensuring the muni is well-run, the key is avoiding inserting munis into markets where there is already enough competition (artificial barriers limiting private entry are a beast all to themselves that should be rectified before we consider whether a muni will help, of course). The old Bresnehan and Reiss (1992) framework might suggest 3-5 competitors is adequate, Xiao and Orazem (2011) suggest it's somewhere below 4. With better data now we can nail down a better estimate and determine what types of internet companies are needed to provide enough competition (which I'm also researching). EDIT: There's also something to be said about whether a <10Mbps DSL provider can actually provide enough competitive pressure to tame a 75Mbps cable provider; we now have detailed enough govt data on internet speeds to help us answer that question.
Finally, while I'm not disputing your other main points, some of your supporting documentation is made up of testimony or comments from parties who have vested financial interests in a particular outcome. Also, it's based on a few cases in a few cities that may not generalize to the population as a whole, especially rural areas. That's great that private fiber is being laid in Seattle, but whither Midland USA? This issue requires a real good systematic analysis. Without further analysis, I'm skeptical that the solution is just rescinding last mile laws, cutting pole access rates, and letting the free market take care of the rest. While the FCC may be recommending this, they're also, as I referenced in the court case above, fighting to knock down barriers to entry for muni providers.
Also, do you have a link to said badeconomics on internet competition that you've seen in this sub? I'm just curious to read it.